I just bought a Torelli frame that originally used older an 126mm rear hub. The previous owner decided to have it cold set to accommodate newer 130mm hubs. My question is, could I use an older friction system like shimano 600, which I believe uses a 126mm rear? Should I add spacers to the axle?

I recall some significant warnings on this subforum against using 126 mm freewheel hubs spaced/axled to 130, something about axles being poorly supported and susceptible to bending and breakage. Something happen to make this a safe thing to do? Or do we know the OP is using a 600 cassette hub rather than a 600 freewheel hub?

I'm still not sure of what hubs I will be using. But I know it will most likely be a 126mm freeWHEEL hub, where the freewheel threads onto the hub. I don't particularly want t put brifters on this bike, nor do I have the money for a decent set right now... It seems like it would be fine as long as I have a long enough axle (140mm?) to use. Any recommendations for inexpensive/decent hubsets?

Sounding like a broken record (and only true C&V-ers will even recognize this reference), I will say as I do every time this question comes up that the best solution is to put 4 more millimetres of spacers on the LEFT side of the 140mm axle. This will give you 5 mm of axle protruding beyond each locknut which is way more than you need. You can often get away with using the original axle from a 126mm O.L.D. hub: you might need to "walk" the cones to the right a little so you don't run out of axle on the left but you need only a millimetre or so of axle sticking out past each locknut. Either way, then re-centre the rim. This will be no more stressful for the axle than the existing 126mm arrangement and gives the additional benefit of reducing the asymmetry of the rear wheel which, by making the left-side spokes more nearly the same tension as the right, makes the wheel stronger. (What stresses and breaks rear axles in freewheel hubs with wider spacing is increasing the distance from the right side ball bearings to the right dropout to accommodate "deeper" freewheels. If you put all the spacers on the left side, you aren't changing this critical unsupported distance.)

To give yourself as much axle room as possible to work with, make sure the right locknut protrudes no more than 3 mm, 3.5 mm tops, beyond the outer face of the smallest cog when the freewheel is screwed on. If there is more than this, move spacer(s) from the right side to the left.

And yes, friction shifting will work fine with it. It will work fine with an 8-speed cassette hub, too, if you decide to go that route eventually. And if you are careful to match the position of the smallest cog on both the freewheel and the cassette hub (3 mm clearance from cog face to locknut) you won't have to adjust the high-limit screw or the cable tension on the derailer when you switch back and forth. (The low-limit screw will have to be tweaked with each wheel change though, since 8 cogs needs more throw than 7.)